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The Bank of the United States

by Ryan J. Morick
 

 

The Bank of the United States is a symbol of the long held American fear of centralization and government control. The bank was an attempt to bring some stability and control and was successful at doing this. However, both times the bank was chartered, forces within the economy ultimately destroyed it.  The fear of centralization and control was ultimately detrimental to the U.S. economy.

During the Revolutionary War there was much need for a strong centralized government that would have been able to collect taxes.  The states were able to issue currency and the government accepted this in exchange for specie.  Specie was very hard to come by in the colonies and most states relied on foreign currency such as Spanish coins to back up their currencies. The Continental Congress issued a Continental Currency in 1775, but due to lack of faith in the currency, it rapidly fell in value and prices skyrocketed.  They were abandoned in 1781. If it weren’t for a massive loan from the French, the war would have ended due to bankruptcy.  During the time period of the Articles of Confederation, each state was able to issue it’s own currency.  The lack of national currency in the United States lead to exchange problems between the states, and also made trading difficult for the U.S.

Alexander Hamilton first created the First Bank of the United States in 1791 to deal with these problems.  It had a tough time getting through Congress due to a debate over if the government has the power to form a central bank.  President Washington signed the charter of the bank, not because he wanted a central bank, but because he saw it as necessary.  During the time the first bank was in operation, trade flourished in the United States. 

 

The Bank was privately run but operated as a fiscal agent of the Treasury.  The stock of the bank was bought and held mainly by the US government and numerous businessmen among the states of the Union.  It paid interest on public debt, issue a national currency, dealt in foreign exchange, paid government officials, and numerous other tasks.  It was both a private and public institution but if asked by the Treasury, it would have to open its books to inspection. 

It appears the bank was a very safe buy in the stock market.  It paid steady dividends put there was rarely any high fluctuation in its stock price.  Meanwhile, many of the state banks at the time had a wild fluctuation in prices.  There were eight branches through the states, but originally Hamiliton thought that branches would be a bad idea because it would cause rivalry with the state banks.  He ended up being right, as this was a contributing reason that the bank eventually failed.

The bank was not a central bank; it just held an account for the government and had little control over the fiscal policies in each state.  However, the state banks still resented the power that the bank had.  This is extremely hard to comprehend when comparing the power of the First Bank and the current Federal Reserve System. 

            The First Bank of the United States lasted until 1811.  In 1804, President Jefferson, who despised the bank, removed any money that the government had from its vaults. When the issue of rechartering the bank came up in 1810, the same debate that came up during the initial attempts to create the bank, resurfaced.  The fact that the Constitution did not state that the government could not incorporate a bank was a main argument against it, and ultimately, the bank was not rechartered.

 

The War of 1812 was a disaster because of this.  It was very difficult for the government to raise money to fight the war.  The government raised its expenses while decreasing its revenues. The government actually used numerous state banks to store the money of the treasury. This greatly increased the power of the state banks. However, to fund the war, the government did two things.  First it secured loans from numerous wealthy individuals in America and issued Treasury notes for the first time.  Both were done very poorly, and ended costing the government more than they were worth.

            After the end of the war, there was a movement to create a Second Bank of the United States.  The financial system was in ruins due to the inadequate measures of the government to collect taxes and also perform measures to secure a stable currency.  In 1814, the British suspended the conversion of currency to specie after a run on the bank due to the burning of the capitol.  This caused massive inflation and the government was unable to repay its debts.  Money borrowed from one state bank could not be repaid to the state in another state bank’s notes.  Since there was no hard specie to repay, the government was unable to pay back the debts.

 This lack of cohesion and its negative effect on the country lead to the creation of the Second Bank of the United States in 1814.  The charge for the bank was lead by Alexander Dallas who was named Secretary of the Treasury shortly before submitting a plan for the new bank.  The same debates were brought up again, but the charter was issued and the Second Bank of the United States was created.

            The First and the Second Bank of the United States had many similarities, but there were a few differences.  There were more branches of the Second Bank and it had a much harder time at thriving like the First Bank.  This could be due to poor management and fraud on part of the directors of the bank.

 

Again there were attacks on the bank and attempts made to destroy it.  The state banks disliked the control that the Second Bank had.  One of the most prominent attacks on the bank was the 1819 Supreme Court case, McCullough vs. Maryland.  The Supreme Court upheld the validity and constitutionality of the bank unanimously, by opposing the right of the state to tax the bank.

            The bank had no control over the vast speculation and inflation during the period from its start to the panic in 1819.  This was again due to poor management.  The bank itself was involved in the speculation and reckless credit extension to people without collateral.  It wasn’t until 1823, when Thomas Biddle was appointed as director of the bank that things started to get under control.  Biddle cracked down on fraud in within the bank, and also helped to reduce the reckless credit extension by reducing the amount of loans the bank was allowed to extend.

 

However, in 1828, Andrew Jackson was elected president.  Jackson was fully anti-bank and was intent on destroying the Second Bank of the United States.  He had the backing of numerous groups in the United States.  Wall Street wanted to become the banking center of the U.S., businesses didn’t like the restraints that the bank was placing on state banks in making huge loans, some still even thought the bank infringed on state’s rights.  So there was a large group of unhappy people that opposed the Bank.  In the end, the bank was not rechartered and in 1836, and there would not be another central banking system until 1913, when the Federal Reserve System was created.

            The period in between was a time of wild speculation and loose restrictions on the state banks.  There were numerous bank failures that lead to panics and vice versa.  The national government took a “hands off” approach. It didn’t charter banks or regulate the state banks.  There were two banking acts passed before the Federal Reserve Act in 1864 and 1865.  These National Banking Acts tried to gain some control over the banking system without another central bank.  These acts had two goals.  First was to create a national currency, which was lacking before, and second to create incorporated banks that were given their charters by the federal government. However, there was still a lack of control by the federal government.

 

This control came after the banking panic of 1907.  There was massive speculation that led to the burst of the stock bubble and a run on the banks.  If it weren’t for a massive infusion of liquidity by investment giants such as JP Morgan the situation would have gotten desperate.  Morgan supported the financial world by guaranteeing loans to any banks that need the infusion of liquidity.

            The Panic of 1907 lead to the call for a banking system that would support the state banks, and also provide a safety net for the system as a whole.  The Federal Reserve Act was passed in 1913.  It involved a rather decentralized system that had a Federal Reserve Board that overlooked the operations of the regional banks.   The bill that was past had the time has undergone numerous changes, and the system implemented at the time is very different from the one now.  Over the years, the system has moved more towards more centralization and control.

As can be seen, the fear of centralization by state banks, and the long-standing opposition to federalization had a vastly detrimental effect on the American Economy. It leads to instability, inflation, banking panics, and near bankruptcy for the government on numerous occasions.  The unique system that the United States have today is a balance between centralization and local control.  This came from the early attempts at organization that were the First and Second Banks of the United States and the forces that destroyed them.  This all lead to the balance in the system that can be seen today.

 

 

 

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